Study Question of the Week: October 16, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, Series 65, Series 79, Series 82 and Series 99. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Study ? of the Week

Question (Relevant to the Series 7Series 62, Series 65, Series 79, Series 82, and Series 99)

Branch Environmental Industries is trading at $2 per share and there are 35 million shares of common stock outstanding. The management and board of directors have decided that in order to make the stock more attractive to institutional investors, the share price needs to rise to $5. In order to accomplish that, the company could do which of the following?

Answers:

A. Initiate a 2.5 for 1 stock split which will increase the number of common shares outstanding to 87.5 million.

B. Initiate a 2.5 for 1 stock split which will reduce the number of common shares outstanding to 14 million.

C. Initiate a 1 for 2.5 reverse stock split which will increase the number of common shares outstanding to 87.5 million.

D. Initiate a 1 for 2.5 reverse stock split which will reduce the common shares outstanding to 14 million.

Correct Answer: D. Initiate a 1 for 2.5 reverse stock split which will reduce the common shares outstanding to 14 million.

Rationale: In order to increase the share price to $5, the company would initiate a reverse stock split, that is reduce the number of shares. A stock split would have the opposite effect, it would increase the number of shares and proportionately lower the share price even further which is not what the company wants. In this case, the reverse stock split would be 1 for 2.5 . Mathematically it would be $2 per share/.4 = $5 per new share price. Thus shareholders would give up two-and-one-half $2 shares and they would receive one $5 share in return. The number of shares common shares outstanding would decrease likewise from 35 million to 14 million (35/2.5 = 14).

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